Chapter 1

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Toronto Metropolitan University *

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PERSONAL F

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Finance

Date

Jan 9, 2024

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Uploaded by PresidentGalaxyCrocodile31

Exam Name___________________________________ TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 1) A non - interest - bearing chequing account is still considered an investment. 1) 2) Land and buildings are examples of real property investments. 2) 3) Securities are investments issued by firms, governments, or other organizations that represent a financial claim on the issuer's resources. 3) 4) A Government of Canada bond is an example of a debt security. 4) 5) Most sources of investment information are in print format, expensive, and difficult to access. 5) MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 6) Which of the following is NOT an investment as defined in the text? A) a Government of Canada bond B) a new automobile C) a certificate of deposit issued by a bank D) a mutual fund held in a retirement account 6) 7) Stocks are a(n) ________ investment representing ________ of a business. A) direct; ownership B) indirect; ownership C) indirect; debt D) direct; debt 7) 8) An exchange traded fund that invests in the stocks of large corporations is an example of A) indirect investment. B) direct investment. C) tangible investment. D) derivative investment. 8) 9) Which of the following has declined in both the US and Canada in recent years? A) the timeliness of information available to investors B) direct ownership of stock by individual investors C) the percentage of foreign stocks held in typical portfolios D) institutional ownership of common stocks 9) 10) Which of the following has increased in both the US and Canada in recent years? A) the percentage of domestic stocks held in typical portfolios B) institutional ownership of common stocks C) direct ownership of stock by individual investors D) indirect ownership of stocks through mutual funds and ETFs. 10) 11) Debt represents funds loaned in exchange for A) dividend income and the repayment of the loan principal. B) interest income and the repayment of the loan principal. C) dividend income and an ownership interest in the firm. D) interest income and a partial ownership interest in the firm. 11) 1

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 12) Institutional investors manage money for businesses and nonprofit organizations, but not for individuals. 12) 13) Institutional investors are individuals who invest indirectly through financial institutions. 13) 14) Banks and insurance companies are examples of institutional investors. 14) 15) In the financial markets, individuals are net suppliers of funds. 15) MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 16) The government is generally A) a supplier of funds to the financial market. B) not involved in the financial market. C) a demander of funds in the financial market. D) the owner of the financial market. 16) 17) On a net basis, funds in the financial markets are generally supplied by A) individuals. B) the government. C) both individuals and business firms. D) business firms. 17) 18) Stocks of large publicly traded companies A) are highly liquid. B) are rarely traded. C) rarely decline in value. D) are illiquid. 18) 19) Which of the following are true concerning institutional investors? I. Institutional investors are professionals who manage money for other people. II. Banks, insurance companies and mutual funds are all institutional investors. III. Institutional investors are individuals who invest indirectly through financial institutions. IV. Institutional investors invest large sums of money. A) I and II only B) I, II and IV only C) II, III and IV only D) I, II, III and IV 19) 20) Which of the following is NOT traded in the securities markets? A) stocks B) bonds C) real estate D) derivatives 20) ESSAY. Write your answer in the space provided or on a separate sheet of paper. 21) Describe the major differences between individual and institutional investors. TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 22) Bond investors lend their money for a fixed period of time and receive interest. 22) 23) A collection of securities designed to meet an investment goal is called a portfolio. 23) 24) Call options on common stock are a form of equity. 24) 2

25) An option to purchase common stock is a type of derivative security. 25) 26) Bonds represent a lower level of risk than do stocks in the same company. 26) 27) Exchange traded funds are similar to mutual funds but are traded like stocks. 27) 28) Mutual funds invest in diversified portfolios of securities. 28) 29) Bond prices rise as interest rates decline. 29) 30) Bond interest and stock dividends are different ways of distributing a corporation's earnings to its owners. 30) MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 31) Which of the following is an example of a tangible asset? A) bonds B) stocks C) mutual funds D) real estate 31) 32) Which of the following would be the least liquid investment? A) real estate B) stocks C) put options D) money market mutual funds 32) 33) Which of the following investments represents partial ownership of a corporation? A) mutual funds B) commercial paper C) common stocks D) bonds 33) 34) Investors seeking a diversified, professionally managed portfolio of securities can purchase shares of A) mutual funds. B) preferred stock. C) insurance policies. D) convertible securities. 34) 35) The major difference between mutual funds and exchange traded funds (ETFs) is A) mutual fund portfolios are always based on one of the major market indexes. B) ETFs can be bought or sold at their current price at any time during normal trading hours. C) ETFs invest in broadly diversified portfolios of securities. D) ETFs are actively managed. 35) 36) One reason that passively managed mutual funds have grown in popularity relative to actively managed mutual funds is that A) active funds are too diversified. B) passive fund returns are always higher. C) passive fund expense ratios are lower. D) active fund returns mimic a market index. 36) 37) Over the past decade, passively managed index funds have A) declined in popularity. B) attracted almost 100% of investment dollars. C) almost disappeared as a fund type. D) grown quite a lot. 37) 3

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ESSAY. Write your answer in the space provided or on a separate sheet of paper. 38) Briefly describe three advantages of investing in mutual funds or exchange traded funds. TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 39) Earning a high rate of return with little or no risk is a realistic investment goal. 39) 40) Under current tax laws, most taxpayers will pay a lower tax rate on capital gains than on dividends. 40) 41) Investors can postpone or avoid income taxes by investing through Registered Retirement Savings Plans. 41) 42) Under current laws, a couple filing jointly with a total income of $75,000 would pay a 15% tax on capital gains. 42) 43) To qualify for long - term capital gains rates, a stock must be held for at least 12 months. 43) 44) Registered Retirement Savings Plans (RRSPs) allow individuals to defer taxes on the plan contributions until the funds are withdrawn from the retirement plan. 44) 45) Contributions to a TFSA are not tax deductible, but subsequent earnings and withdrawals are tax free. 45) 46) The taxes and tax credits are different for eligible dividends and non - eligible dividends in Canada. 46) 47) The average tax rate is the rate a person pays on their next dollar of income. 47) MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 48) Which of the following represent investment goals? I. saving for major expenditures such as a house or education II. sheltering income from taxes III. increasing current income IV. saving funds for retirement A) I and IV only B) III and IV only C) I, III and IV only D) I, II, III and IV 48) 49) In selecting investments consistent with your goals, you should consider A) risks, returns, and taxes. B) annual dividends and taxes only. C) the pre - tax rate of return only. D) rates of return and taxes only. 49) 50) Alexandra purchased a stock one year ago at a price of $64 a share. In the past year, she has received four quarterly dividends of $1.50 each. Today she sold the stock for $76 a share. Her capital gain per share is A) $6.00. B) $18.00. C) $12.00. D) $(6.00). 50) 4

51) A well - conceived investment policy statement will take into account A) the types of investments the investor is willing to consider. B) the investor's preference for frequent or infrequent trading. C) the investor's current age and economic situation. D) all of the above. 51) 52) New investors with small amounts to invest should A) buy a portfolio of very low - priced stocks (penny stocks). B) invest all of their money in one high - quality stock. C) buy mutual funds or exchange traded funds (ETFs). D) avoid stock investments completely. 52) 53) Research indicates that investors who monitor their portfolios less frequently A) earn rates of return similar to those who hold investments for the long term and trade infrequently. B) tend to invest in riskier assets. C) are more highly educated and in higher income brackets than those who hold investments for the long term and trade infrequently. D) outperform those who hold investments for the long term and trade infrequently. 53) 54) Table 1.2 2020 (due April 15, 2021) Tax rates Individual Returns Joint Returns 10% $0 to $9,525 $0 to $19,050 12% $9,526 to $38,700 $19,051 to $77,400 22% $38,701 to $82,500 $77,401 to $165,000 24% $82,501 to $157,500 $165,001 to $315,000 32% $157,501 to $200,000 $315,001 to $400,000 35% $200,001 to $500,000 $400,001 to $600,000 37% Over $500,000 Over $600,000 Josh earned $82,500 in taxable income, all from wages and interest, and files an individual tax return. What is the amount of Josh's taxes for the year 2020? Round to the nearest dollar. A) $12,285 B) $13,750 C) $18,150 D) $14,090 54) 55) Tax planning A) is limited to reviewing income for the current year and determining how to minimize current taxes. B) ignores the source of income and concentrates solely on the amount of income. C) guides investment activities to maximize after - tax returns over the long term for an acceptable level of risk. D) is primarily done by individuals with incomes below $200,000. 55) 56) Investors seeking to increase their wealth as quickly as possible would invest in A) smaller companies pursuing rapid growth. B) large company stocks with high dividends. C) corporate bonds and preferred stock. D) government bonds and low - risk income stocks. 56) 5

57) A person's marginal tax rate is the rate they pay A) only on earned income. B) on all income. C) on the next dollar of income. D) only on investment income. 57) 58) During which period are stock returns typically the lowest? A) during a recession B) there is no discernible pattern C) 12 months after a recession D) 6 months before a recession 58) ESSAY. Write your answer in the space provided or on a separate sheet of paper. 59) Discuss the relationship between stock prices and investors' beliefs about the business cycle. 60) What are some of the important prerequisites to investing? 61) Discuss the general investment philosophy and the types of investments preferred by investors in each phase of the life cycle. TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 62) Government of Canada Treasury Bills mature in 1 year or less. 62) 63) Liquidity is the ability to convert an investment into cash quickly with little or no loss of value. 63) 64) Short - term investments generally provide liquidity, safety, and a high rate of return. 64) 65) Money market accounts, certificates of deposit, bonds and commercial paper are all forms of short - term investment vehicles. 65) 66) Investors can use short - term securities as a temporary place to "park" funds before deciding where to invest the money on a long - term basis. 66) MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 67) The primary risk associated with a short - term investment is A) purchasing power risk. B) interest rate risk. C) default risk. D) economic risk. 67) 68) Short - term investments I. provide liquidity. II. fill an important part of most investment programs. III. provide a high rate of return with low risk. IV. provide resources for emergencies. A) I and IV only B) II and IV only C) I, II and IV only D) I, II, III and IV 68) 69) Which of the following short - term investments provide the most liquidity? A) a corporate bond B) a guaranteed investment certificate C) money market mutual funds D) a chequing account 69) 6

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70) Canada Deposit Insurance Corporation (CDIC) insures up to $100,000 per account for A) deposits in Savings Accounts. B) deposits in Chequing Accounts. C) chequing and savings accounts in Credit Unions. D) all of the above. 70) 71) Which of the following has the lowest level of risk? A) Treasury bill B) commercial paper C) banker's acceptance D) money market mutual fund account 71) TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 72) Certified Financial Planners typically manage institutional portfolios. 72) 73) A major goal of corporate financial management is to increase the value of the firm to investors. 73) 74) Stringent regulations and vigorous enforcement have all but eliminated unethical behaviour by financial professionals in recent years. 74) 75) Insurance companies invest the premiums and fees collected from customers to neutralize the risks assumed from their clients. 75) 76) Chartered Financial Analyst (CFA) is a degree offered by several prestigious business schools. 76) MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 77) Funds that merely track a broad index and make no attempt to identify undervalued or exceptional growth stocks are known as A) actively managed funds. B) equity funds. C) hedge funds. D) passively managed funds. 77) 78) Jobs in which of the following fields require an understanding of the investment environment? I. commercial banking II. corporate finance III. financial planning IV. insurance A) I and IV only B) I, II and IV only C) II, III and IV only D) I, II, III and IV 78) 79) A major function of investment banking firms is A) assisting businesses when they issue stocks and bonds. B) developing investment strategies to neutralize risk. C) providing financial planning services to wealthy individuals. D) All of these are major functions of investment banking firms. 79) 7

80) Which of the following has set an outstanding example of ethical behaviour in the financial professions? A) Hank Greenberg of AIG B) Bernard Madoff of Madoff Securities C) Ramalinga Raju of Satyam Computers D) none of the above 80) 81) In Canada, the most prestigious designation for financial planners is A) CFP. B) CLU. C) IA. D) CPA. 81) ESSAY. Write your answer in the space provided or on a separate sheet of paper. 82) Briefly describe three different career paths that require a strong background in investments. 8

Answer Key Testname: UNTITLED1 1) FALSE 2) TRUE 3) TRUE 4) TRUE 5) FALSE 6) B 7) A 8) A 9) B 10) D 11) B 12) FALSE 13) FALSE 14) TRUE 15) TRUE 16) C 17) A 18) A 19) B 20) C 21) Individual investors manage their own funds to achieve individual goals such as increasing financial security or financing a comfortable retirement. Institutional investors, such as mutual funds and insurance companies, manage funds for individuals who lack the time or expertise to invest individually and for other institutions such as universities or charities. 22) TRUE 23) TRUE 24) FALSE 25) TRUE 26) TRUE 27) TRUE 28) TRUE 29) TRUE 30) FALSE 31) D 32) A 33) C 34) A 35) B 36) C 37) D 38) The investor does not need to spend a great deal of time researching individual securities. Small investors easily achieve diversification by investing indirectly in a broad portfolio of securities. The funds are managed by professionals who presumably have expertise in making investment decisions. 39) FALSE 40) FALSE 41) TRUE 42) FALSE 43) TRUE 44) TRUE 45) TRUE 9

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Answer Key Testname: UNTITLED1 46) TRUE 47) FALSE 48) D 49) A 50) C 51) D 52) C 53) B 54) D 55) C 56) A 57) C 58) D 59) Stock prices tend to anticipate the economic conditions that investors expect in the future. When they believe that economic conditions will deteriorate and profits will decline, stock prices fall. When they expect an improving economy and higher corporate profits, stock prices rise. 60) Before entering into risky investments, individuals need to provide for the necessities of life such as housing, transportation, and taxes. They should have liquid assets available to meet unforeseen emergencies such as job loss, auto repairs or dental treatments. They should also have insurance for catastrophic events involving health or property. 61) Life Cycle Phase Philosophy Types of Investments Young investors Growth Growth stocks, options, and futures Middle - aged investors Growth and income Higher quality stocks, preferred stocks, convertibles, high - grade bonds, and mutual funds Retired investors Preservation of capital Low risk stocks, short - term and current income bonds, certificates of deposit 62) TRUE 63) TRUE 64) FALSE 65) FALSE 66) TRUE 67) A 68) C 69) D 70) D 71) A 72) FALSE 73) TRUE 74) FALSE 75) TRUE 76) FALSE 77) D 78) D 79) D 80) D 10

Answer Key Testname: UNTITLED1 81) A 82) Students may discuss any of the following career paths. Answers will vary. Responsibilities of commercial bankers may include portfolio management, managing short - term securities, and advising individuals as personal bankers. Corporate financial managers must raise external funds through the debt and equity markets, manage short - term investments, and understand investor expectations for their business. Financial planners assist individuals in choosing the investments that will help them meet their short - and long - term goals. The insurance industry employs professionals to invest and manage the large sums collected from premiums. Within the investment management industry, professionals may work as securities analysts, fund managers, or retail brokers. 11